As Macklowe went, so goes Eichner: A microcosm of the commercial market
By: Myles, May 9th, 2008
History does seem to repeat itself more often than not. So here we go again ….
In a fascinating expose in the Wall Street Journal, Jennifer Forsyth chronicles how property mogul, Ian Bruce Eichner, is poised to take yet a second fall from grace in less than two decades.
Forsyths WSJ piece not only documents the present state of commercial lending and development activity (or lack thereof), but more importantly outlines in great detail the mess we are truly in today, and how all things seem to come full circle, and repeat themselves, given time.
Was this all the result of high-finance, or blind ambition? Here is an extended excerpt from the article …
Mr. Eichner’s roller-coaster track record shows that in commercial real estate, failure on an epic scale need not be a career killer. Other prominent developers also had to surrender projects to lenders in the 1990s, only to borrow more money and fail again in the most recent cycle.
Earlier this year, New York developer Harry Macklowe, who gave back several buildings more than a decade ago, defaulted on short-term loans he used last year to buy seven Manhattan skyscrapers for $7 billion, because he was unable to line up long-term financing. (Read the full story on Harry Macklowe, as documented in our Blog)
The willingness of lenders to give such developers more money helped fuel the commercial real-estate boom that started in 2003 and reached its zenith in early 2007.
Some of those lenders now face the potential for loan losses. Centro Properties Group, one of the largest shopping-center owners in the U.S. and Australia, for example, has been unable so far to repay $4.9 billion in short-term debt owed since December to creditors including J.P. Morgan Chase & Co., Bank of America Corp. and Commonwealth Bank of Australia.
Hardly anyone is predicting that souring commercial real-estate loans will cause the kind of banking crisis that struck in the late 1980s and early 1990s, when large banks in the U.S. and Japan had sizable chunks of their loan portfolios tied up in the collapsing sector.
Although commercial real-estate values have softened in some markets, they haven’t experienced the kind of free fall that occurred back then.
And this time around, lenders tried to spread the risk. They gathered loans into pools and sliced them up for sale to investors as commercial mortgage-backed securities (See our extensive Blogs on CMBSs), much as housing lenders did on the consumer side of the market.
So far, securities backed by commercial mortgages are performing far better than their residential counterparts, whose implosion helped set off today’s broader credit crunch. (See our analysis on CMBX Indexes and more)
But like residential lenders, some commercial real-estate lenders, including Wall Street investment banks, were lulled by sharp increases in property values and projections for fat profits.
Competition among lenders was so intense that developers were allowed to kick in less and less of their own money — sometimes less than 1%.
For the full detail, and a story that reads more like a novel of epic proportions than a cut-and-dry financial story, read the full WSJ article. It is well worth your time. Guaranteed!
Tags: Commercial Development
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